The oil crash could bring a radical new change to Saudi Arabia's investment fund

King Salman bin Abdul-Aziz
Al Saud makes his first speech as king following the death of
King Abdullah.AP

NEW YORK/DUBAI (Reuters) - Saudi Arabia plans to create a new
sovereign fund to manage part of its oil wealth and diversify its
investments, and has asked investment banks and consultancies to
submit proposals for the project, according to people familiar
with the matter.

Plunging oil prices have strained Saudi Arabia's finances. The
kingdom's state budget deficit is at a record high and net
foreign assets dived more than $100 billion in 15 months.

The new fund could change the way tens of billions of dollars are
invested and affect some of the world's leading asset managers,
particularly in the United States, where the bulk of Saudi
Arabia's foreign assets are managed.

"Keeping the foreign reserves at a good level is necessary to
maintain a solid financial position and support the riyal," said
one of the sources.

Another source said the Saudi government sent out a "request for
proposal" to banks and consultants late last year, seeking ideas
on how to structure a new fund.

The sources asked not to be identified because the plans are
confidential. They said the Saudi government did not tell them
the size of the planned new fund.

One source said the fund would focus on investing in businesses
outside the energy industry, such industrials, chemicals,
maritime and transportation. The sources stressed that no final
decisions had been made, and a range of options were being
studied.

The sources said managers of the planned fund may be able to
invest directly in companies rather than channelling investments
through foreign asset managers. This could maximize returns.

The second source said he understood the new fund would ideally
be up and running within 12 to 24 months, with an office in New
York.

A spokesman for the Saudi Arabian Monetary Agency (SAMA) could
not be reached for comment. SAMA, which currently manages the
vast bulk of petrodollars earned by Saudi Arabia, has
traditionally been secretive about its management of the
money.

DEALING WITH CHEAP OIL

SAMA's net foreign assets totaled $628 billion in November, down
from a record high of $737 billion in August 2014, when the
government started drawing down assets to pay its bills as
falling oil prices saddled it with a huge budget deficit.

The assets, some of which are handled by global fund firms, are
mainly securities such as U.S. Treasury bonds and deposits with
banks abroad. Equities are believed to account for only a small
fraction of securities holdings, perhaps 20 percent. The bulk of
assets are believed to be denominated in U.S. dollars.

The conservative, low-risk instruments SAMA favors have been
criticized for yielding modest returns, especially with global
interest rates as low as they are now. In 2014, Saudi billionaire
Prince Alwaleed bin Talal urged the government to create a new
fund to earn higher returns.

At the time, Finance Minister Ibrahim Alassaf insisted there was
no need for a new fund. But policy-making authority has shifted
since King Salman took the throne in January last year and
created a powerful Council of Economic and Development Affairs
chaired by his son, Prince Mohammed bin Salman.

With the advice of Western consulting firms, Prince Mohammed is
pushing a range of reforms for an era of cheap oil. Steps include
spending cuts, higher taxation and privatization. The plan for a
new sovereign fund is part of this drive.

In drafting its reforms, Saudi Arabia has examined the policies
of other rich oil exporting Gulf countries. Part of the new Saudi
fund would operate much like a private equity investor, buying
major stakes in foreign companies as the sovereign funds of Qatar
and Abu Dhabi do, but it would also use other forms of
investment, the sources said.

(Additional reporting by Celine Aswad in Dubai and Marwa Rashad
in Riyadh; Writing by Andrew Torchia)